Chancellor Alistair Darling has caved into pressure from backbench Labour MPs to recompense low earners who suffered a loss in take home  pay, due to the scrapping of the 10p tax band at the start of this tax year.

The Chancellor has announced that he will raise the personal tax allowance by £600 to 6,035, so that every basic rate taxpayer will pay £120 less tax this year.

He is also raising the 40p rate threshold so that higher earners’ tax bills will not be affected,  saying that the change was the “fairest and most effective way” to help those who lost out from the scrapping of the 10p tax rate.

This means that 22 million people on low and middle incomes will gain an additional £120 this year - with a £60 lump sum paid in September pay packets, plus £10 a month for the following six months until the end of the 2008-09 year.

“At a cost of £2.7bn, I will increase the individual personal tax allowances by £600 to £6,035 for this financial year, benefiting all basic rate taxpayers under the age of 65,” he said.

Around 4.2m households will receive as much or more than they lost when the 10p starting rate of tax was scrapped. The remaining 1.1m households will see their loss at least halved.

The Chancellor added: “In other words, 80 per cent of households are fully compensated, with the remaining 20 per cent, compensated by at least half. In addition, 600,000 other people on low incomes will be taken out of income tax altogether.”

But Francesca Lagerberg of accountants Grant Thornton said that low income earners on £7,455 will still be £32.40 worse off at the end of the 2008-09 tax year, despite the changes. 

Having slapped down business demands last week for a U-turn on his capital gains tax reforms, the pressure on the Chancellor of the Exchequer, Alistair Darling, to reconsider continues to mount.

And there may be a chink of light at the end of the tunnel. Having acknowledged the near-unanimous opposition to his proposals, particularly his decision to scrap the 10 per cent rate for business assets held for two years or more, the Chancellor may still be open to persuasion.

For instance, Lord Sainsbury, the former science minister, yesterday told a group of venture capitalists that a reprieve from the new regime might be possible, if they could make a case for early stage investors in businesses. Even Labour MPs such as George Mudie, a leading Brownite, have expressed dismay at the lack of consultation.

All of which begs the question, as to why Mr Darling embarked on this wholesale reform of CGT without better advice on its implications for venture capitalists, small businesses and employees in SAYE schemes.

All these groups will suffer under the new regime, when the original target was the carried interest of private equity investors who pay less tax than their cleaners.
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The cack handed handling of this whole affair and the failure to consult beggars belief, particularly when the Prime Minister has always presented himself as a supporter and proponent of venture capitalism.

Let’s hope sense prevails and the necessary tweaks are made to the new regime so as introduce greater simplification, without hurting the very people who are building the businesses of the future on which our economy depends.

What’s the betting that some, or all, of the capital gains tax changes announced in the pre budget report will be withdrawn, given the furore that these poorly thought out proposals have caused?

Alistair Darling has managed to upset just about everyone, except the very individuals in the private equity industry who were supposed to be the target of his changes.

The private equity chappies have got off relatively lightly, whereas ‘the little people’ (as millionaireress, Leona Helmsley, would say) who have invested iin SAYE share option schemes, Enterprise Management Initiatives, AIM shares and individuals with holiday home lettings, are all potential losers under the flat rate regime of 18 per cent CGT and the axing of taper relief..

Given the former Chancellor’s propensity for spectacular and unexpected U-turns, I see no reason why his successor shouldn’t do likewise.

George Osborne’s inheritance tax proposals at the Tory party conference this week were a master stroke and worthy of consideration.

At a stroke, he delivered hope to millions of middle England households, who under the current rules could face punitive inheritance tax bills in the future, due to rampant increases in house prices and personal wealth, and a tax exempt threshold which has failed to keep pace withb this inflation.

Supporters of inheritance tax (yes, they do exist) argue that only around 37,000 estates currently pay the tax. But that misses the point. It is the effect of double digit house price inflation over much of the last decade and the increase in general household wealth which has sucked millions of estates into a potential tax liability in the future that counts.

According to research by Scottish Widows, under the current inheritance tax threshold of £300,000, almost four in 10, or 9.4 million homeowners will have an estate liable for IHT on their death.

This is because almost 4.8 million homeowners have properties worth more than £300,000 and when total household wealth is taken into account, a further 4.5 million households would be liable to pay IHT.

In fact, average household wealth stood at £269,117 in April 2007, only 11 per cent under the £300,000 threshold.

Even though the latter is set to rise to £350,000 by 2010 (assuming that Labour is still in power), this will leave many people with a problem if house prices and household wealth continue to rise.

All of which makes the proposed lifting of the threshold under Osborne’s proposals so eminently sensible, providing that his estimates of the amount of tax that can be raised from wealthy ‘non doms’ add up. But that’s another story….

It was presented as a tax cutting budget, but it was in fact tax neutral. The Chancellor said as much, but most people listening to his speech could be forgiven for thinking otherwise. So small wonder then that it has been dubbed a ‘stealth’ budget.

The abolition of the 10p tax band (on up to £2,150) was glossed over, while the 2 per cent cut in income tax was saved for a final flourish at the end of his speech, giving the impression that this was a massive tax giveaway, when in fact the two moves virtually cancel each other out. After all, he made a point of saying that the proposed 20p rate was “the lowest for 75 years.”

Another example of less than transparent communication was his boast of a £600 increase in the amount that savers will be allowed to invest in a mini cash ISA. That’s all fine and dandy, but the £600 comes at a cost of reducing the amount you will be able to invest in a mini equities ISA to £3,600, compared to £4,000 today. The overall increase in the ISA allowance will be a princely £200.

So who will be the winners and losers, given the complexity of the interaction between personal taxes, allowances and tax credits?

Mike Brewer of the Institute for Fiscal Studies says: “Those earning over around £42,000 will find their disposable income almost unaffected by the personal tax changes. However, almost 1 in 5 families in the UK will lose out, and, unusually for a Brown budget, the losers come from across the income distribution, and include some families with children.”

So here we have another instance of the Chancellor appearing to do one thing, but actually doing another. In his speech, he says: “I have focused support on families by raising child benefits and child tax credits,” when in fact no extra cash is going into child benefit at all until April 2010.

It is the child element of the child tax credit and the working tax credit which are being raised to help lone parents back to work, with extra help to those living in London.

However, the alignment of the tax and national insurance systems is to be welcomed, as the interaction of these taxes is notoriously complex. In future, National Insurance will stop at the point where higher rate tax kicks in, currently at £38,335 (2006-07).

But wouldn’t it be better to simply raise the personal income tax allowance for everyone to around £10,000 and put an end to the mind boggling complexity of the tax credit system, which few understand and which costs a small fortune to administer.

The saving to the public purse from getting rid of the army of civil servants who have to administer our complex tax and benefits system would go some way to paying for this measure and might win our Prime Minister-in-Waiting some friends among employers, who are currently required to act like a de-facto extension of the social security system.